Economists at Bank of America Merrill Lynch (BofA) have advised clients they have yet again had to slash their forecasts for the global economy, blaming "the lack of an effective policy response to control the spread of the virus in developed markets and some emerging markets," for the move.

BofA say governments in western economies have failed to learn the lesson of China, which proved that the most effective policy in dealing with the coronavirus outbreak is to enforce a quick and strict lockdown.

"Each week of ineffective health policy adds roughly a week to the duration of the shutdown," says Ethan S. Harris, global economist at BofA. "This not only damages the current quarter but also means a deeper confidence shock and an even weaker post-shutdown recovery."

The warning comes as UK Prime Minister Boris Johnson on Thursday expressed concern that car journeys were increasing, a sign that the public is increasingly ignoring instructions for citizens to stay at home.

"Yesterday's data showed more people were using transport than in previous days," said Johnson. "Please do not leave your house unless absolutely necessary. It really will save lives."

There are suggestions from political journalists that the government might have to enforce stricter measures to further suppress the spread of the coronavirus, but such a move would surely knock economic growth further and push up a fast-rising unemployment rate.

Yet, the case of the UK provides a case-in-point for the team at BofA who say an inability to enforce a strict lockdown from an earlier starting point ultimately translates into greater economic damage.

You may leave your house to exercise once a day and you should combine this with walking your dog.

Harris says the response by Asian countries to the disease leave Western countries with three key takeaways:

1) Governments must be fully transparent about the risks of the virus.2) Policymakers must aggressively and consistently advertise to the public both the dangers of the disease and the behavior needed to limit its spread.3) Social distancing must be applied consistently across regions with high levels of migration. Unfortunately, many countries have been slow to adopt these lessons, which likely means a longer fight to flatten the curve.

BofA now forecast European growth to fall by 7.6% in 2020 compared to a decline of 1.7% previously. They have cut U.S. growth to -6.0%, down from -0.8% previously.

"Even these forecasts are at risk if either region fails to follow through on a strong, national policy of social distancing. The only upside risk, in our view, is either a medical breakthrough or that the disease slows in warmer weather. Neither seems likely in the near term," says Harris.

BofA have revised their 2020 global growth from 0.3% to -2.7%. "This is considerably worse than the 2008-09 recession," says Harris.

"The unfolding global contraction is poised to supplant the Great Financial Crisis (GFC) as the new benchmark for extreme economic disruption – the current collapse in economic activity is much deeper within individual economies and is enveloping a much broader range of economies concurrently than was the case in the 2008 crash," says Daniel P Hui, a strategist at JP Morgan.

U.S. economists at JP Morgan last week more than doubled their expected quarterly contraction for the U.S. economy in the second quarter and they now expect the economy to be 10% smaller by mid-year.

Giving a flavour as to the scale of the contraction was the release last week of U.S. jobless claims for March which suggest U.S. unemployment surged 2.0% in a single week, confirming suspicions that the speed of the current downturn is unprecedented, "and that the extent and duration of the downturn remains difficult to pin down," says Hui.

According to JP Morgan, the peak contraction in developing market economies in the first half of 2020 is now forecast to be almost twice as severe as during the GFC, moreover this is occurring over only two quarters compared to the 1.5 years during the GFC.

JP Morgan warn that unlike during 2008 and subsequent years, China will not be able to buffer global growth unlike in 2008, indeed economists at the investment bank forecast China to contract 10% in the first quarter of 2020.

"China’s shutdown in 1Q underscores the much more synchronised nature of the current downturn compared to 2008 when global growth as a whole didn’t contract until 3Q08 after Lehman’s," says Hui.

Above: Percentage of countries contracting per quarter. The downturn is also much more synchronised and immediate than 2008, which took longer to gather speed and affect other economies despite the US starting to contract by Jan 2008 say JP Morgan.

There has been an increase in the number of companies considering laying off staff and freezing wages in order to safeguard working capital over coming months, according to the latest Lloyds Business Barometer.

The UK furlough scheme for employees and its equivalent for the self-employed are costing HM Treasury one percent of annual economic output per month, newly released figures showed this week, explaining concerns about the budget deficit as well as nascent and forthcoming government efforts to wind it down.

American welfare claims rose further last week despite a widespread view that the bottom of the coronavirus-splattered economic trough was seen in April and suggesting that U.S. unemployment climbed deep into the second quarter, but there was a silver lining in the small print as well as in downwardly-revised GDP figures.

The UK economy suffered a 18.1% plunge in retail sales in the month of April, a record collapse but one that is hardly surprising given the scale of the economic shutdown enforced by the government in its effort to stop the spread of covid-19.

This website carries advertisements for providers of leveraged trading products. Please be aware that YOUR CAPITAL IS AT RISK if you should choose to engage in their services.

The news and information contained on this site is by no means investment advice. We intend to merely bring together and collate the latest views and news pertaining to the currency markets - subsequent decision making is done so independently of this website. All quoted exchange rates are indicative. We cannot guarantee 100% accuracy owing to the highly volatile and liquid nature of this market.